Dealing with late payment and unpaid invoices can feel a bit like walking a tightrope. On one hand is the need to push clients for prompt payment. On the other is the desire to keep things cordial, continue doing business with them, and stop the relationship crashing and burning.

When it comes to freelancing, contracting, or running a small business, most veterans and novices alike can attest to one thing – getting paid late is a royal pain. And not getting paid at all doesn’t even bear mentioning.

Silent killer

According to Anil Stocker, co-founder and CEO of financial technology company and peer-to-peer lender, MarketInvoice, “Late payment is the silent killer of modern business.” His firm spent the last five years looking at 30,000 invoices issued in over 80 countries and their research noted a “harmful practice” of late payments and unpaid invoices.

MarketInvoice found that, compared to the US and other parts of Europe, the UK has a more prevalent problem with overdue payments. A shocking 62.3% of invoices in 2015 were paid late. The US averaged significantly lower at 45.7% and the European average was 40.4%.

The net result is that to stay afloat and in the black, UK firms have to set aside solid chunks of time every week to chase late-paying clients. This could otherwise be spent pitching, promoting, and growing their business – precious time that can never be clawed back.

The problem is even more acute in the public sector, despite Governmental measures put in place to force all public sector bodies to settle invoices issued by SMEs within 30 days.

What are the effects of late payment?

Notes and coins relating to unpaid invoices

Late payments are anything but a minor inconvenience. They can (and often do) have major consequences – not least lower profits and the inability to pay staff and suppliers on time.

Moreover, late payments can cost you your business. Last year, global provider of e-invoicing, invoice financing, and spend analytics, the Tungsten Network, surveyed 1,000 senior decision-makers in SMEs. 23% said that late payments put them at risk of closure. And with these closures is the potential for scores of dreaded job losses, too.

What reasons are given for unpaid invoices?

There’s a bottomless pit of excuses on hand for unpaid invoices but, more often than not, it boils down to poor credit management.

It could be something completely innocent, like your client not having a purchase order number for you or invoicing the wrong entity (yes, it’s been known to happen). Or it could be more calculated, such as your client disputing an invoice simply to avoid paying it. Then there are situations where the client is genuinely disputing that your service has been properly delivered and has withheld payment accordingly.

Regardless of the reason behind it, late payment – and especially non-payment – hits your pocket no less hard.

How to chase an unpaid invoice (without chasing your client away)

So, your payment deadline has passed and all you can hear is the sound of, well, crickets.

First, shoot a casual payment reminder email over to your client and, if you don’t get any joy (in terms of a meaningful response), follow-up with a call to their accounts department. If neither of these methods yields any fruit, you may want to get a bit more formal. We have some free Late Payment Reminder templates for you to use.

Write a letter or email to your client stating that, if your invoice isn’t paid within a certain number of days, you’ll charge them statutory interest, which is 8%, plus the Bank of England base rate for business-to-business transactions, which is currently 0.5%. So, the total statutory interest payable on the invoice would be 8.5%.

Let’s say your client owes you £2,500 and they’re 40 days late:

  • The annual statutory interest payable would be £212.50 (2,500 x 0.085 = 212.50)
  • The daily interest payable would be £0.58 (212.50 ÷ 365 = 0.58)
  • After 40 days, the interest payable would be £23.20 (40 x 0.58 = 23.20)

While conventional wisdom suggests charging late payment interest, small firms are somewhat reluctant to stake their claim. According to Zurich Insurance’s latest SME Risk Index, only 20% applied (or tried to apply) late payment interest on unpaid invoices. Your business can always be one that adds to this tally.

Using a debt collection agency

Another way to handle late payment and unpaid invoices is to use a debt collection agency, such as our very own Crunch Collections.

Unlike their depiction in East End folklore, debt collection agents don’t have any special powers and reputable firms won’t intimidate debtors. They just do all the running for you – write letters, make phone calls, and so on.

They operate on a “no collection, no fee” basis and usually charge between 5% and 15% of the amount collected. Again, this depends on the volume and complexity of the debt. In certain circumstances, you can assign the unpaid invoice to an agency, which then becomes the legal owner of the debt.

A good debt collection company will handle the process of sorting your unpaid invoices delicately, ensuring you don’t put yourself at risk of losing the client forever.

 

Getting solicitors involved

If your client steadfastly refuses to pay, you may need to take things a step further. A solicitors’ firm that specialises in debt recovery typically charges an hourly rate or a percentage of the value of the unpaid invoice (usually around 10%). Generally speaking, the costs you’ll incur will depend on the size, age, and complexity of the debt owed.

To locate a solicitor that offers debt recovery services in your area and is regulated by the Solicitors Regulation Authority, Find a Solicitor is a free online service run by the Law Society.

Whether you use a solicitor or a debt collection service, you’re entitled to charge your client a fixed sum for the cost of recovering a late payment (this is in addition to claiming statutory interest). The sum depends on the size of the debt.

Money Claim Online

If you want to save money on solicitors and debt collection agency fees, using the Money Claim Online service is a good way of doing so. Plus, you can recoup your costs.

If you’re a sole trader or small business owed a fixed sum of less than £100,000, all you need to do is register for a UK Government Gateway account and spend half an hour or so completing the small claims court form.

The way it works is that your client will receive a letter from court prompting payment. If they don’t cough up within a certain period of time (and some don’t), the court will register a County Court Judgment (CCJ) against your client, which is like having a huge black mark against their credit score for the next six years. However, a CCJ doesn’t guarantee payment and you may still need to take further action to recover the debt.

Something to bear in mind if opting for this route is that it’s highly likely to pour water on whatever business relationship you had with your client, so don’t go expecting any more work from them.

How can you prevent late payment?

The best way to prevent yourself running around after late payments and unpaid invoices is to be fanatical about credit control.

These six simple steps will help prevent your invoices sliding down your client’s to-do list.

  1. Put the feelers out on your would-be client’s reputation and run a credit check before adding them to your roster.
  2. State clear payment terms in your Terms and Conditions of Business – when payment is due, overdue, and so on.
  3. Prior to starting work, request payment up-front or, at the very least, a deposit (especially for larger contracts).
  4. Invoice immediately once you finish the work and include information on statutory late payment interest (and don’t hesitate to apply these charges to late-paying clients).
  5. Schedule polite payment reminders before the invoice falls due.
  6. Make friends with the person(s) who handles your client’s invoices. Having a good working relationship with them can be invaluable when chasing payments.

It’s also worthwhile pondering whether clients are as valuable to you as you once thought. After all, late-paying clients aren’t assets, they’re liabilities. For those clients that do make the cut, they won’t mind you taking no prisoners when it comes to credit control. They’ll appreciate that, if you’re strict with your business affairs, the chances are that you’ll be strict with theirs, too.

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